Startup law blog

​Whether you are an employee, advisor, officer, or founder of a startup, you will likely encounter some form of stock options or restricted stock. Having a working knowledge of the basic terminology surrounding the issuance of shares in a corporation will prove essential in understanding (and negotiating) the terms of your own status as a shareholder.

Upon formation, corporations authorize to issue a specified number of shares. These are the “authorized” shares from which corporations can issue shares to investors, employees and partners. Generally, shares are considered “issued” when the corporation has entered into an agreement with a shareholder to purchase or earn the shares. Shares may be issued from time to time, at the corporation’s discretion – meaning that they do not necessarily have to be issued all at once.

“Options” refer to a right to purchase shares in the future. Typically, options are issued pursuant to the corporation’s equity compensation plan. A corporation may grant options to various individuals and/or entities for a specific number of shares. This number cannot exceed the total number of shares that the corporation is authorized to issue and typically cannot exceed the number reserved specifically for the equity compensation plan (the “Equity Reserve”). The individual and/or entity can exercise their option to purchase the shares in the future. Until the option is exercised, these shares are not counted as “issued” shares.

“Warrants” are similar to options in that they refer to the right to purchase the corporation’s stock at a specific price, by a specified date. Warrants are typically used by corporations to entice investors into purchasing shares or making other financial commitments.

“Outstanding” shares are the number of shares that have been issued by a corporation. The number of outstanding shares cannot exceed the number of shares that the corporation is authorized to issue. “Outstanding” does not count options or warrants that have not been exercised.

“Fully Diluted” shares refer to the total number of shares of a corporation that are issued and outstanding as well as the number of shares reserved for issuance upon the exercise of Options or Warrants.

When assessing the percentage of ownership of a corporation for purposes of negotiation or compensation, it is important to understand the difference between Outstanding and Fully Diluted shares and whether the promised percentage is a portion of the Outstanding shares or the Fully Diluted shares.

For further information on this topic, please stay tuned as we continue to update our blog!